Retention, also called retainage, is money held back from each payment to ensure that a contractor or subcontractor completes a project. It provides a financial incentive to ensure the work is of appropriate quality and meets the plans and specifications.
It is intended to cover additional expenses if the contractor or subcontractor does not finish the work or there is a quality issue.
The project owner usually holds retention from the general contractor’s payments and the contractor, in turn, holds it on the subcontractors. Depending on your agreements, retention may or may not apply to material suppliers.
Retention receivable and payable are not the same as accounts receivable and payable
Retention receivable is not the same as accounts receivable; it should not simply be considered an unpaid portion of an invoice to a customer.
Retention receivable is recorded by general contractors and subcontractors to account for the funds due from a contractor’s customer for retention.
Because retention receivable is not due until the project is completed (or when a specified percentage of the project is completed), it is recorded in a separate current asset (type) account in the general ledger.
Retention payable is not the same as accounts payable; it should not be recorded simply as an unpaid portion of a vendor's bill.
Retention payable is recorded by owners and general contractors to represent the amount owing to suppliers (contractors, subcontractors or vendors) for retention.
Since these funds are not due until the project is completed (or when specified percentage of a project or suppliers work is completed or materials provided), they are recorded in a separate current liabilities (type) account in the general ledger.
Typically, when the retention for a project is moved from retention receivable to accounts receivable, the project’s retention due to suppliers and subcontractors should be moved from the retention payable account to accounts payable.
Recording retention receivable 'The QuickBooks Way'
When retention is subtracted from a customer’s invoice, the amount held is recorded as retention receivable.
Once the project is complete and you are billing your customer for the retention held throughout the project, the amount moves from retention receivable to accounts receivable.
Example:
On a contract for $450,000, the customer initially is invoiced (as a first progress invoice) for $45,000 with 10% retention. The invoice is recorded creating a credit to the income account for $45,000 but with an offsetting item for retention in the amount of $4,500.
Notice that the Retention Item is for a negative amount. Accordingly, the balance of the invoice is $40,500 (shown below).
Illustration created using Intuit QuickBooks Enterprise version 23.0.
The invoice debits $45,000 to accounts receivable and also debits $4,500 to retention receivable (shown in the transaction journal below).
Illustration created using Intuit QuickBooks Enterprise version 23.0.
After additional work the customer is invoiced for an additional $90,000 with 10% retention. The invoice is recorded creating a credit to the income account for $90,000 but with an offsetting item for retention in the amount of $9,000.
Once again, notice that the retention item is for a negative amount. The balance of this second invoice is $81,000 (shown below).
Illustration created using Intuit QuickBooks Enterprise version 23.0.
The corresponding transaction journal reflecting the debits and credits (shown below).
Illustration created using Intuit QuickBooks Enterprise version 23.0.
If we look at a report showing the retention transactions in QuickBooks, we can see that a total of $13,500 has been posted to Retention Receivable (shown below).
Illustration created using Intuit QuickBooks Enterprise version 23.0.
In accordance with the contract, the contractor is entitled to collect accrued retention when 30% of the work has been satisfactorily completed (as determined by the architect or property owner/customer.
As such, the contractor issues the customer an invoice for $13,500 against the Retention Receivable account (see below).
Notice the same retention item is used on the Invoice as previously used, but this time it is for a positive rather than a negative amount.
Illustration created using Intuit QuickBooks Enterprise version 23.0.
The invoice clears the customer retention receivable to the contractor’s accounts receivable (from the customer) while awaiting payment. In the transaction journal (shown below), you can see the invoice debits $13,500 to accounts receivable while crediting $13,500 against retention receivable.
Illustration created using Intuit QuickBooks Enterprise version 23.0.
The processes shown in this example are repeated as each project continues.
Remember, revenue (income) is recorded with each invoice except the final (or progress, if authorized) invoice(s) for the amount of retention the customer owes the contractor.
Recording retention payable 'The QuickBooks Way'
Retention payable is the process whereby owners and general contractors an amount owing to suppliers (contractors, subcontractors or vendors) for retention.
Example:
For the same contract as shown in the previous example, the contractor hires a subcontractor to perform the concrete work. The agreed amount of the contract is $40,000, subject to 10% retainage to final completion of the contractor’s job.
In other words, the concrete sub-contractor will only be paid $36,000 upon completion of his work and will receive the remaining $4,000 when the overall project is completed by the contractor.
Initially, the concrete subcontractor submits a bill to the contractor for $20,000 after approximately 50% of the concrete work is performed.
The contractor enters a vendor bill in QuickBooks for concrete (an item) in the amount of $20,000 and offsets that item with a retention payable item in the amount of $2,000.
Illustration created using Intuit QuickBooks Enterprise version 23.0.
The vendor bill debits $18,000 to accounts payable (to the vendor) and also credits $2,000 to retention payable.
It also posts the entire $20,000 to Job Related Costs (which could be either a cost-of-construction, or a construction expense account-type (shown in the transaction journal below).
Illustration created using Intuit QuickBooks Enterprise version 23.0.
Approximately a month later, the concrete sub-contractor submits a second bill to the Contractor for the remaining $20,000 representing the second half of the concrete work performed.
The contractor enters a new vendor bill in QuickBooks for concrete (an item) in the amount of $20,000 and offsets that item with a retention payable item in the amount of $2,000.
Note that the retention payable item is again entered for a negative amount. The net amount of this second vendor bill is $18,000.00 (shown below).
Illustration created using Intuit QuickBooks Enterprise version 23.0.
The Retainage Payable Report (below) shows the accumulation of the sub-contractor’s retainage being held as an Other Current Liability account-type.
Illustration created using Intuit QuickBooks Enterprise version 23.0.
After the contractor’s job is completed, it is time to pay the subcontractors the retainage due them. In some cases, subcontractors will bill the contractor for the amount of the retainage due, in other cases the contractor simply pays the subcontractors without any invoice.
If a bill is received it can be entered with a Retainage Payable item in which the amount is recorded as a positive amount. If the contractor simply wishes to pay the subcontractor, they can write a check for the retainage (as shown below).
Illustration created using Intuit QuickBooks Enterprise version 23.0.
The Transaction Journal (below) reflects the debits and credits associated with the above check.
Illustration created using Intuit QuickBooks Enterprise version 23.0.
Looking at the Retainage Payable account register (below), it shows that the retainage has been cleared as a result of the check being issued.
Illustration created using Intuit QuickBooks Enterprise version 23.0.
Wrapping it up
We have examined both sides of the retainage equation associated with construction work, Retainage Receivable from customers and Retainage Payable to vendors.
Following "The QuickBooks Way" of recording retainage, users will properly reflect their income and expense (or costs), and properly track retainage assets and liabilities.
Author's Note: This accounting method is not associated with construction in progress or the percent of completion earned income reporting methodology where revenues earned and costs incurred are recorded on the balance sheet until the project is either finalized, or specified completion phases are completed. For information related to those reporting methods, refer to another source.
Disclosures
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